Nikkei, Shanghai lead Asia lower on strong yen, China concerns

Asian stocks were dealt a blow on the final trading day of the week as concerns over a repeat of June's credit crunch in China overshadowed gains on Wall Street.

Japan's Nikkei fell to a two-and-a-half-week low, the Shanghai Composite declined to a seven-week low while South Korea's Kospi and Indian shares were both modestly lower. Australia's S&P ASX 200 was the region's outperformer, closing at a new five-year high.

Meanwhile, the U.S. dollar was sold off against a basket of currencies. The greenback hit a fresh two-year low against the euro, two-week low against the yen and a two-month low against Indonesia's rupiah.

China's short-term money market rates continued to spook investors after the 7-day repo rate, a key gauge of liquidity, rose to 4.8 percent on Friday while the overnight repo rate jumped to 7.5 percent, its highest level since June.

China will see recession if credit slows: Expert

Gillem Tulloch, Group Leader of the rebranded Asianomics Group explains why markets are afraid of rising interest-rates in China.

The central bank tightened liquidity by withdrawing cash from the system for the third time in two weeks on Thursday. Analysts attribute the measure to rising home prices, hot money flowing into banks and the fact that recent data shows strength returning to the economy, which could be giving the PBOC more room to tighten.

"Asia is being dictated by China and moves in money markets and equities. Money markets could feasibly continue to move higher in the short term, but I've full faith the PBOC will have an upper limit in mind where it will provide the necessary liquidity to interbank markets, however for now the markets seem more sanguine ahead of the weekend," said Chris Weston, market strategist at IG.

Japan's benchmark index widened losses after the yen rose to 97 per dollar, experiencing its biggest one-day fall in over two months. Meanwhile, the nationwide core consumer price index (CPI) climbed 0.7 percent in September from a year earlier, in line with expectations.